Thursday, February 19, 2009 0 comments ++[ CLICK TO COMMENT ]++

The unfolding saga of the Stanford Financial Group

People line up outside Bank of Antigua, a bank run by Standard Financial Group.
Source: Reuters via Sky

Well, it looks like there are runs on various banks owned by Stanford Financial Group. Venezuela seized the bank that was operating in that country and it's not clear if other Carribean nations will do so as well. As I remarked before, this is truly unfortunate given how this mostly affects the average citizens, many of whom may have their life savings at this bank. Stanford seems to be a global and deposit insurance may be weak or non-existent in many foreign countries. Even in America, it is possible some, possibly small businesses or special fund investors, may have lost huge sums.

This is an interesting case because the SEC seems to have been investigating the bank for more than 6 months. I wonder if this is a case of the company speculating on stocks, hedge funds, and private equity, among others, and getting blown up after the market crashed late last year. Although issuing "safe" high-interest CDs--equivalent in Canada would be GICs--is questionable to begin with, it does seem to imply that the banks had been able to pay the high interest for many years. Either it's a massive ponzi scheme or it is a questionable investing scheme where the bank probably made money for years but it blew up after assets crashed last year.

Similar to the Madoff situation, it seems that this financial group and its banks were audited by a tiny accounting firm in Britain:

The firm -- CAS Hewlett & Co. -- was the auditor for Stanford International Bank and was run by Charlesworth Hewlett until his death last month. Of three addresses registered in London, residents at two had no knowledge of Hewlett and the third was a one-room office previously used by the accountant, the Financial Times reported.

The firm's Antiguan office, meanwhile, is run out of just two rooms, with an old typewriter and an eight-year-old telephone directory on the reception desk, the FT had separately reported.

Although using a tiny firm is not necessarily indicative of anything illegal--Warren Buffett, for instance, is known for using minimalist accounting and legal support--it does raise the issue of competency. Given how the principal of the accounting firm seems to have passed away last month, I wonder if that played any role in uncovering the scheme.

In the meantime, the public, or at least the media, has been unable to locate the CEO. The SEC doesn't seem to have located him either and it doesn't seem interested in pursuing him, although I'm sure they would prefer to talk to him about some details. This sort of makes sense given how he isn't facing any any criminal charges yet. The US government may also not have any extradition treaties with countries where he may be suspected of being so the US government may not have much power. It all depends on the country in question.


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